It’s déjà vu again.
China announced today that it is canceling all petroleum product exports outside Hong Kong and Macau, effective immediately. No duration for the export ban was announced.
If you went through the trauma of March to July, you may remember that China’s lack of crude buying and the start of the oil shuttle trade marked the beginning of the big drop in crude.
I mean, who can forget? Everyone went through the mental exercise of why China wasn’t buying crude. Why are China’s crude inventories not dropping?
Yes, it was a painful period for sure, and this announcement is bringing back some bad memories.
But this isn’t March and China’s elevated product inventories, one of the key reasons for the lack of crude buying, are no longer there to support the domestic market.
Please keep in mind that accurate Chinese petroleum product inventories are sparse. China does not disclose its commercial or SPR inventories to the rest of the world. This is likely due to national security reasons.
Since the start of the Iran war, China’s refineries have throttled back meaningfully as crude imports fell. With persistently low refinery runs relative to the past and nonexistent demand destruction, China’s product inventories are now sitting at decade lows.
China has exhausted most of the levers it used at the beginning of the war. As I have detailed in the past, China is the only place on Earth with excess refining capacity, so the export ban will make an already horrendous global product situation even worse today. If the US announces a diesel export ban on top of that, it would send global diesel prices through the roof.
From a high-level perspective, the timing of this export ban, coupled with additional attacks from Iran on the Oman lane, signals that no deal was reached with the US.